Egypt's house prices falling sharply; but outlook remains positive

Under President El-Sisi, Egypt is a police state run by the army, with high levels of corruption, so there are people who want to move money abroad. And for the past two years it has been possible to freely move money out of Egypt, which reduces the attractions of local real estate as an inflation hedge. On the other hand, tourism is booming again, the currency is free-floating, the economy is recovering, and Egyptian real estate is cheap. So the likely outlook is medium-term falls, but longer-term recovery.

The nationwide real estate price index fell by 11.7% during the year to Q1 2019, in contrast with the y-o-y growth of 18.2% seen in the same period last year, according to Egypt's leading real estate portal Aqarmap. When adjusted for inflation, the decline almost doubled to 22.6%. Egypt's high inflation rate is the reason for the huge gap between the nominal and the real price changes.

Five years after President El-Sisi assumed power, much has changed in Egypt. While formally a democracy, Egypt now has a tightly controlled press and media, and many political prisoners. On the economic front, in November 2016 Egypt floated the Egyptian pound (EGP), causing a dramatic depreciation against major currencies.

In turn this sparked extraordinarily high inflation. Egypt's headline inflation peaked to 33% in July 2017. Inflation has subsided since, slowing to 14.2% in March 2019 – though it is still far higher compared to an annual average inflation of 9.4% from 2012 to 2016.

It may come as something of a surprise therefore, that Egypt's housing market is widely expected to rise strongly in value in coming years - and high-end construction is booming to meet demand.

Consider the situation from the perspective of the wealthy Egyptian. If he lives abroad, Egyptian property has suddenly become much less expensive, because of the currency depreciation. In March 2019, the average exchange rate stood at EGP 17.37 per USD 1 – about 49% decline from its value of EGP 8.88 per USD 1 before the decision to float the currency. For those who live in Egypt, the decline in prices makes houses more affordable, making it the right time to purchase. There is a huge, real demand for housing in Egypt, as the country's population increases by 2.5 million annually and there are about one million marriages taking place every year.

But the economic transition is full of risks. The competence of the Egyptian government is low. Grand schemes such as the expansion of the Suez canal and the move of the administrative capital out of Cairo have been adopted with too little input from rational economic planners.

Yet for all that, other reforms seem likely to boost the economy, and hence the property market.

In 2015, Law 17/2015 was ratified by President al-Sisi, relaxing restrictions on foreign ownership of land and property, and allowing the government, Egypt's biggest landowner, to contribute land to the private sector as part of public-private partnership schemes against a share of the revenue.

In addition, the government implemented several reforms recently, in line with the three-year IMF reform programme:

A value-added tax (VAT) was introduced.

Egypt's Investment Law was amended to attract more foreign investors.

Fuel and electricity subsidies will be cut by 40.5% and 75%, respectively, in the FY 2019-20.

The price of sugar was raised by 40%.

The CBE has abolished a 'priority list' for imports.

The time and day limits during which banks are allowed to execute foreign currency exchanges have been extended.

The economy grew strongly by 5.3% in 2018, up from annual GDP growth rates of 4.2% in 2017, 4.3% in 2016, 4.4% in 2015, and 2.9% in 2014, according to the International Monetary Fund (IMF). In fact, it was the highest growth since 2008, thanks to strong tourism and natural gas activity. The economy is expected expand by 5.5% this year and by another 5.9% in 2020, based on IMF estimates.

Foreigners can buy property in Egypt, under Law No 230 of 1996. However, foreigners cannot buy more than two pieces of real-estate, which cannot exceed 4,000 square metres (sq. m.), and their purpose must be for a family member to live in the property. If registered, the property cannot be sold or rented for five years.

Egypt: real estate market relatively unscathed by revolution

Rental rates are bottoming out in the residential real estate market of Cairo, according to Jones Lang LaSalle’s latest real estate report. The rental market seems to be reaching its lowest point and sooner or later, rental growth will start accelerating. In fact our figures already showed some growth, with a rise in rent demanded of around 10% from last year. The average rent per sq. m. ranges from USD 7 to USD 9 per month, whereas last year, it was around USD 6 to USD 8 per sq. m. per month.

The average buying price per square metre (sq. m.) of apartments in Cairo’s upscale neighborhoods remained more or less unchanged during the year to August 2012. Apartments in Maadi, Zamalek, among others, cost around USD 1,000 per sq. m.

A great majority of the apartments in our survey are located in Cairo’s old rich neighborhoods such as Maadi and Zamalek, though quite a few were located in the nouveau rich neighborhoods like Katameya Heights and El Rehab City.

Some of the neighborhoods to watch out for are in New Cairo. New Cairo is a part of the Beit Al Watan Project of the Ministry of Housing which provides 8,000 land plots (with sizes ranging from 300 to 800 sq m).

The apartments in our survey are listed on Egypt’s popular real estate websites like e-dar. In Egypt, it is a common practice among realtors to not archive old ads in their website. Ads listed as early as 2004 still appear on websites. Although we took extra proper care to include only apartments listed in 2012, we still have doubts about the veracity of the information on some of these ads.

Expats looking for apartments prefer direct methods rather than using realtors. One of the most popular methods is going to the American University in Cairo to look for apartment ads. Another one is going directly to the residential building of choice, and ask the bowab or the doorman for vacancies.

Moderate costs; complicated buying process

Round-trip transaction costs are around 11.30%; mostly consisting of the real estate agent’s fee (2.5% to 3% plus 10% sales tax), legal fees (3%), transfer tax (2.5%) and capital gains tax (2.5%). Investors should be cautious of the complex ownership and registration process; e.g., only around 10% of properties in Cairo are registered and there are numerous foreign-ownership restrictions.

Egypt's landlords are weakly protected by law

Rent: New tenants do not enjoy rent protection. Nor do they have the right to remain in the apartment at the expiry of the contract, although in the socialist past Egypt’s rental market was highly regulated.

Tenant Security: If however tenants do not leave, in Egypt eviction can easily take more than a year. So it is preferable to rent to foreigners, who are less likely to overstay.

Strong economic growth; improving government finances

Egypt’s economy grew strongly by 5.3% in 2018, up from annual GDP growth rates of 4.2% in 2017, 4.3% in 2016, 4.4% in 2015, and 2.9% in 2014, according to the IMF. In fact, it was the highest growth since 2008, thanks to strong tourism and natural gas activity.

The economy is expected to remain strong, with projected real GDP growth rates of 5.5% this year and another 5.9% in 2020, as various economic reforms are expected to support business investment and private consumption in the coming years, according to the International Monetary Fund (IMF).

The government’s IMF-spurred policy reforms have contributed to an upgrade of its sovereign credit rating by Fitch Ratings in March 2019.

“It seems likely these reforms will continue to generate better economic outcomes beyond the IMF agreement,” said Fitch Ratings. “General government debt/GDP is on a downward path, underpinned by structural improvements to the budget and the emergence of primary budget surpluses.”

Egypt’s budget deficit fell to 9.5% of GDP in 2018, down from 10.4% in 2017, 11.2% in 2016, 11.6% in 2015, 12% in 2014 and 13.3% in 2013, according to the Ministry of Finance. In fact, it was the lowest deficit recorded since 2010. The deficit is projected to decline further to 8.6% of GDP this year, according to Fitch Ratings.

The country’s consolidated general government debt is also forecast to decline to 83% of GDP this year, from 93% of GDP in 2018 and a peak of 103% of GDP in 2017.

In addition, the floating of the pound has helped the country narrow its current account deficit. In 2018, the deficit fell to 2.5% of GDP, from 3.5% of GDP in 2017. During the current fiscal year, the current account deficit is expected to fall further to 2.3% of GDP, supported by growth in tourism revenues, non-oil exports, and rising gas production.

Tourist arrivals surged 37% to 11.3 million visitors in 2018 from a year earlier, according to World Tourism Organization. This improvement is surprising, given that Egypt’s tourist industry was very badly hurt by the country's political turmoil, and by the ISIL bombing of Russian Metrojet Flight 9268 over the Sinai peninsula in 2015, which killed 224 people, indefinitely halting all Russian flights to the country, and by the deadly bombing of Coptic churches in Tanta and Alexandria in 2017.

However, high inflation has aggravated social tensions, given the country’s persistently high unemployment and poverty incidence. Around half of Egypt’s 97 million people are living near or below the poverty line. Unemployment was 8.9% in Q4 2018, down from 10% in the previous quarter and 11.3% during the same period last year, according to state statistics agency CAPMAS.

There were about 2,491,00 unemployed people in 2018, including 1,445,000 men and 1,046,000 women.

Egypt’s unemployment rate averaged 12% from 2010 to 2017, according to the IMF.

High inflation is also a major concern. In March 2019, annual inflation stood at 14.2%, slightly up from 13.3% a year earlier, according to the CBE.

The prime cause of the high inflation was the devaluation of the Egyptian pound. On November 3, 2016, the CBE devalued the pound tentatively to EGP 13 per USD 1 (46.3% down from its previous rate of EGP 8.88 per USD 1). But the EGP quickly depreciated further, reaching EGP 18.12 = USD 1 in June 2017.

Inflation surged to 23.5% in 2017 and to 20.9% in 2018, as a result to Egypt’s dramatic step of allowing its domestic currency, the Egyptian pound, to trade freely – a necessary condition for the IMF to grant the country a US$12 billion loan.

The domestic currency has slightly strengthened in recent months, with the average exchange rate improving at EGP 17.37 = USD 1 in March 2019.